Herbalife Nutrition Ltd. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts are in U.S. dollars; financial statements are unaudited. Herbalife sells nutrition and personal-care products through independent Members and, in China, through independent service providers and other channels.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $1,501.6 million | $1,262.4 million | +18.9% |
| Gross profit / margin | $1,187.3 million / 79.1% | $1,016.7 million / 80.5% | Margin down 147 bps |
| Operating income / margin | $222.5 million / 14.8% | $95.6 million / 7.6% | Higher |
| Net income | $147.4 million | $45.6 million | +223.2% |
| Diluted EPS | $1.33 | $0.32 | Higher |
| Operating cash flow | $110.1 million | $141.7 million | Down $31.6 million |
- Sales growth reflected a 16.9% increase in worldwide Volume Points, price increases and favorable currency movements. Local-currency sales rose 17.8%.
- Operating cash flow was below net income; working-capital movements, including changes in other current liabilities, receivables and inventory, weighed on cash generation. Investing cash flow was negative $33.4 million.
- Cash and cash equivalents were $611.7 million at quarter-end, down from $1,045.4 million at December 31, 2020. Working capital was $319.7 million, down from $648.5 million. Management said cash, operating cash flows and available credit should meet foreseeable needs for at least 12 months.
- Carrying value of debt was $2,581.0 million, versus $2,428.4 million at year-end; debt principal was $2,682.8 million. The company was in compliance with credit-facility covenants. Shareholders’ deficit was $1,362.3 million.
- Capital expenditures were $27.3 million on the MD&A basis. Management expects full-year 2021 capital expenditures of approximately $175–$225 million.
Material changes and business drivers
- Primary Reporting Segment sales increased 24.2%; China sales decreased 10.8% (17.1% in local currency). China Volume Points fell 19.1%, reflecting tighter eligibility requirements for service providers, pandemic disruptions to meetings and lingering effects of China’s health-industry review.
- Sales rose in North America (+29.8%), EMEA (+36.9%) and Asia Pacific (+22.4%); Mexico (+2.9%) and South and Central America (+4.9%) grew more modestly. Brazil sales fell 31.5%.
- Gross margin declined as freight costs rose with greater home delivery, alongside unfavorable currency, country mix and inventory write-down impacts. These were partly offset by price increases and favorable manufacturing and sourcing costs.
- SG&A fell $42.3 million, mainly because Q1 2020 included $83.0 million of expenses related to the China FCPA investigations; the reduction was partly offset by higher labor, professional-fee and promotional costs. Royalty overrides rose to 31.6% of sales from 30.2%.
- Interest expense, net increased to $37.5 million from $25.0 million, primarily due to higher average borrowings. Q1 2021 also included $15.9 million of China government grant income, compared with $9.1 million a year earlier; future grants are not assured.
Outlook, risks and unusual items
- Management expected Volume Point growth in 2021 but cautioned that the prior-year growth rate may not be sustained. The filing gives no specific earnings or revenue guidance.
- COVID-19 continued to disrupt product access, in-person training, Nutrition Clubs and Member selling activities in some markets. Management said demand remained at or above pre-pandemic levels overall, but could not predict the duration or magnitude of future effects, including supply-chain impacts.
- Q1 share repurchases totaled $621.3 million, including approximately $600 million to repurchase 12.5 million shares from Carl Icahn and affiliates. The cash-flow statement reports $645.0 million of total share repurchases, including shares withheld for employee taxes. A new three-year $1.5 billion authorization was approved; approximately $1.48 billion remained at quarter-end.
- Debt includes variable-rate secured borrowings and fixed-rate notes, including $600 million principal of 7.875% notes due 2025 and $400 million principal of 7.250% notes due 2026. The company amended its credit facility in February 2021 to reduce the Term Loan B interest margin. A 1% rate increase, with borrowings unchanged, could increase annual interest expense by approximately $10.3 million, partly mitigated by swaps.
- Material regulatory exposure includes the FTC Consent Order and a three-year DOJ deferred prosecution agreement, with ongoing compliance and reporting obligations following 2020 FCPA-related resolutions. The filing also describes tax disputes and assessments in Mexico, Brazil, India, Korea and China; outcomes and potential losses for several matters are uncertain.
- Other risks include Member recruitment and retention, direct-selling regulation, product liability, foreign-exchange exposure, China-specific regulatory conditions, and restrictions under debt covenants. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess the durability of sales and Volume Point growth, particularly outside China, and whether pandemic-era demand persists.
- Track China’s service-provider recruitment and sales recovery, as well as further regulatory developments.
- Reconcile earnings growth with lower operating cash flow and substantial working-capital movements.
- Evaluate leverage, upcoming principal maturities, variable-rate exposure and the capacity for further repurchases under debt covenants.
- Review the status and possible financial effects of the FTC, DOJ/FCPA and international tax matters; the filing does not provide a clear total estimate for potential losses across unresolved matters.